FDD - FDD: Unattractive European Dividend ETF
2023-03-29 13:59:43 ET
Summary
- First Trust Dow Jones STOXX European Select Dividend 30 Index ETF selects 30 European stocks with high yields relative to country averages.
- The heaviest countries are the U.K. and France.
- Valuation ratios look very attractive, but they are biased by the heavyweight of financials.
- Compared to a benchmark and to competitors, FDD performance is average.
This article series aims at evaluating ETFs (exchange-traded funds) regarding past performance and current portfolios. As holdings change over time, reviews may be updated when necessary.
FDD strategy and portfolio
The First Trust Dow Jones STOXX European Select Dividend 30 Index ETF ( FDD ) is tracking the STOXX Europe Select Dividend 30 Index. It was launched on 8/27/2007, has 30 holdings, a 12-month distribution yield of 5.64% and a total expense ratio of 0.58%. Distributions are paid quarterly.
As described in the prospectus by First Trust , the underlying index selects companies in the STOXX Europe 600 Index that have a non-negative 5-year dividend growth rate and a dividend-to-earnings ratio of 60% or less.
For every eligible company, the dividend yield is divided by the dividend yield of its country index. Initially, the securities with the 30 best ratios are included in the index. Constituents are not removed as long as they are ranked in the top 60. When constituents are removed, the highest ranked candidates are added until reaching 30 constituents. They are weighted based on their net dividend yields, with a maximum weight of 15%. The index is reconstituted and rebalanced annually.
As of writing, the fund is quite balanced between large and mid-caps (53% and 47% of asset value, respectively).
In this article, I will use as a benchmark the MSCI Europe Investable Market Index, represented by the iShares Core MSCI Europe ETF ( IEUR ).
The two heaviest countries are the U.K. and France in both funds. The next chart plots FDD top 10 countries, representing 94% of assets. Please note that Sweden, which is in the top 10 of IEUR, is not in this list.
Country allocation (chart: author: data: FirstTrust and iShares)
The fund is overweight in financials, with about 32% of asset value in this sector. It is followed by materials (19%) and utilities (13.5%). Other sectors weigh no more than 11% individually and 35% in aggregate. Compared to the benchmark, FDD massively overweights the top 3 sectors, as well as real estate, and to a lesser extent communication. It underweights industrials and ignores healthcare, consumer staples, technology and energy.
Sector breakdown (chart: author: data: FirstTrust and iShares)
FDD looks much cheaper than the benchmark regarding the usual valuation ratios, reported in the next table. However, the weight of financials is skewing these ratios to the downside.
| FDD |
| IEUR |
| P/E TTM |
| 5.94 |
| 13.66 |
| Price / Book |
| 0.85 |
| 1.82 |
| Price / Sales |
| 0.63 |
| 1.27 |
| Price / Cash Flow |
| 4.25 |
| 8.85 |
The fund is quite concentrated: the top 10 holdings, listed below, represent 42.7% of asset value. Their individual weights are between 3.4% and 5.6%, so risks related to individual companies are moderate.
| Security Name |
| Ticker |
| Weight |
| Sector |
| A.P. Moeller - Maersk A/S |
| MAERSKA.DC |
| 5.58% |
| Industrials |
| Yara International ASA |
| YAR.NO |
| 4.82% |
| Materials |
| Taylor Wimpey Plc |
| TW/.LN |
| 4.73% |
| Consumer Discretionary |
| Glencore Plc |
| GLEN.LN |
| 4.60% |
| Materials |
| Rio Tinto Plc |
| RIO.LN |
| 4.33% |
| Materials |
| Legal & General Group Plc |
| LGEN.LN |
| 4.13% |
| Financials |
| Endesa, S.A. |
| ELE.SM |
| 4.12% |
| Utilities |
| ACS, Actividades de Construccion y Servicios, S.A. |
| ACS.SM |
| 3.59% |
| Industrials |
| Close Brothers Group Plc |
| CBG.LN |
| 3.42% |
| Financials |
| NN Group N.V. |
| NN.NA |
| 3.41% |
| Financials |
Past performance
The next chart compares total returns since IEUR inception (6/12/2014). FDD is lagging the MSCI index by about 20% in almost 9 years, which is about 2% in annualized return.
FDD vs. IEUR since June 2014 (Seeking Alpha)
FDD has also been lagging in the last 12 months:
FDD vs. IEUR, last 12 months (Seeking Alpha)
The share price has gone sideways since 2009, and it has lost 63% since 2007.
FDD share price since inception (Seeking Alpha)
The next chart compares FDD with two international dividend ETFs, in the last 10 years: the First Trust Dow Jones Global Select Dividend ETF ( FGD ) and the SPDR S&P Global Dividend ETF ( WDIV ). The 3 funds are almost on par.
FDD vs. 2 competitors, last 10 years (Seeking Alpha)
Dividend growth and currency effect
The sum of annual distributions per share was $0.61 in 2012 and $0.69 in 2022: this is a weak annualized dividend growth rate of 1.2%.
The dollar went up about 25% vs. the euro since FDD inception, and about 22% in 10 years. Even measured in euros, performance stays quite underwhelming. The 10-year annualized dividend growth rate in Euro is below 2%. Some assets are not in euros (U.K., Norway, Switzerland), it’s just to reframe the fund’s performance from a European perspective.
Takeaway
First Trust Dow Jones STOXX European Select Dividend 30 Index ETF selects 30 European stocks based on their high yields relative to country averages. The U.K., France and Germany represent almost half of asset value. Valuation ratios look very attractive, but the fund is overweight in financials, which is a serious bias for these metrics. Compared to a European benchmark and to competitors, First Trust Dow Jones STOXX European Select Dividend 30 Index ETF historical and recent performance is average. Return and dividend growth look unattractive even from a Euro-based point of view.
For further details see:
FDD: Unattractive European Dividend ETF